by Maurie Backman | Sept. 6, 2020
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Borrowing a larger sum of money is harder than usual due to the COVID-19 crisis. Here's how to increase your chances of getting a jumbo loan.
You'd think buyers would be shying away from purchasing homes during the COVID-19 crisis, but with mortgage rates dropping, many people are still buying homes. What if you live in an area where home prices are very expensive? In that case, you might need a jumbo mortgage.
A jumbo mortgage is defined as a mortgage that exceeds the conforming loan limits set each year by Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy home loans and make them available to investors. For most of the country, a mortgage above $510,400 is considered a jumbo loan. But in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, a mortgage of up to $765,600 is considered a conforming loan, and anything above that is a jumbo loan.
If you're thinking of applying for a jumbo mortgage today, here are a few things you need to know:
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Jumbo loans are generally more difficult to qualify for. That's both because you're borrowing more money and because Fannie Mae and Freddie Mac won't guarantee them as they would conforming loans. Additionally, before the pandemic it was possible for mortgage loan originators to sell jumbo loans to investors, thereby reducing their risk. Now, that market has largely dried up, which means jumbo mortgage originators can't unload those loans on investors -- they have to keep them and hope borrowers manage to keep making their payments.
As such, if you apply for a jumbo mortgage during the COVID-19 pandemic, you may have a harder time getting approved. In fact, jumbo loan originations recently have fallen more than 90% from a year ago, according to the Mortgage Bankers Association.
Your chances of getting approved for a jumbo mortgage may be higher if you apply with a lender you already have an account with. For example, if you have a sizable chunk of savings at a given bank, that bank may be more willing to work with you on a jumbo mortgage than a bank you've never held assets with before.
With a conventional mortgage, you can qualify with a credit score of 620 or above. But that won't fly for a jumbo mortgage. Under normal circumstances, you'll generally need a score that's higher than 700 to qualify for a jumbo mortgage. Nowadays you might need to aim for the mid-700s or higher. You can boost your credit score quickly, however, by paying off a large chunk of your existing debt, and also by correcting errors on your credit report that may be working against you.
Now's not an easy time to apply for a jumbo mortgage, but it can be done. If you're going to pursue a jumbo loan, make sure your credit is strong, your income is stable, and you have the funds for at least a 20% down payment. Shop around to find the best mortgage lender for your loan.
But most importantly, make sure you can actually afford the monthly payments that come with a jumbo mortgage. The last thing you want is to fall behind on your mortgage and risk the unpleasant consequences that could then ensue, like damaging your credit and losing the home you fought so hard to buy.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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